Iran must abandon oil and gas buy-back contracts

The caretaker oil minister said that the oil and gas “buy-back” scheme, set up for contracts with foreign companies in order to overcome a constitutional barrier to them holding equity, should be abandoned.
“Buy-back is not approved of and finance schemes have also become problematic. We should find new alternatives,” said Kazem Vaziri-Hamaneh, who is still acting as oil minister following the rejection of President Mahmoud Ahmadinejad's previous nominees for the post by parliament.

“Buy-back has had some problems. Most officials do not approve of it,” he told on the sidelines of an oil and gas forum in Tehran.
“But we will definitely have foreign partners in our contracts and we welcome foreign investment under appropriate conditions and prices,” Vaziri-Hamaneh said.

Iran's constitution, drafted after the 1979 Islamic revolution, puts oil and gas within the state sector and forbids concessionary basis or direct equity stake production-sharing agreements with foreign firms.
As an alternative, Iran had worked out the buy-back formula -- under which foreign companies are repaid development costs and given an agreed rate of return from initial production.

But foreign companies have complained the scheme gives them no guarantee they will be permitted to develop their discoveries, let alone operate them. Oil companies also dislike the short-terms of buy-back contracts, which are usually valid for five to seven years.
Analysts have repeatedly said Iran -- holder of the world's second-largest oil and gas reserves -- is under pressure to at least modify arrangements if it wants to meet targets to boost its oil production capacity from 4.2 mm bpd to 5.4 mm by 2010 and then to 7 mm by 2015.